Why ERGP is bound to fail (1)

THE Federal Government’s Economic Recovery and Growth Plan 2017-2020(ERGP) was designed with the broad objective of restoring growth, investing in social infrastructure and building a globally competitive economy. The Sunday Sun Newspaper’s Onyedika Aghedo’s interview with this writer on the feasibility of the ERGP follows hereafter.

Is the Economic Recovery and Growth Plan 2017-2020 (ERGP) achievable?

As they say, history serves as a very good guide for the future. Consequently, it is appropriate to ask: have we had a plan of this nature before? What were the expectations? What was the reality?

When the question of feasibility is examined from these perspectives, we will make a better prediction of the utility of the present ERGP, which is, really a rehash of similar earlier plans, such as, the Vision 2010, NEEDS, and Vision 2020. These economic blueprints have the same objectives of inclusive growth, increasing employment rate, improved social infrastructure and welfare. So, basically, in terms of intent and purposes, this particular plan is not different from earlier ones.

How successful were the earlier ones?

The undeniable fact is that the economy has always been run without recourse to the critical benchmarks indicated in these plans. So, ultimately the plans all failed to achieve the objectives of revitalising and diversifying the economy, or meaningful increase in productivity and competiveness, and infrastructure. The unflattering results should trigger the next question, which is, why did they all fail? The truth is that they all failed because they were in denial of the critical significance of best practice management of money supply in any economy.

Naira

Government’s fiscal and visionary plans are not implemented in a vacuum; such plans must be founded upon standard platforms that drive successful economies everywhere. The necessary platform for inclusive growth, increasing productivity, employment and export competiveness, cannot be consolidated through by just fiscal interventions, such as, our futile hope on annual fiscal expenditure as the main driver of economic growth.

For example, the 2017 N7trillion+ fiscal plan is presently celebrated as our highest ever annual budget. But we fail to also recognize that N7 trillion today is equivalent to possibly N3.5 or N4 trillion three/four years ago. Thus, despite the huge nominal increase, expenditure did not really expand; if anything, the nominal sum spent may increase, but in terms of real value, the fiscal injection may be absolutely static or even possibly retrogressive.

Besides, in our economy, where requirement for power infrastructure alone, is speculated at over $100 billion, while the 2017 N7trillion budget is only about $21 or $22 billion, it becomes clear that even if the whole budget was expended on power alone, our power needs would still remain largely unsatisfied, while the rest of the economy would remain prostrate.

Furthermore, so long as inflation rate continues to be double digit, while Naira exchange rate persistently slides, our economy will probably also be static or may even recede in terms of net real value, even if the expenditure budget quadrupled in nominal terms. So, the reality is that fiscal injections or concessions that facilitate operations in certain business sectors may barely tickle the economy, but it is certainly misplaced hope that our economy would ever grow with nominal rather than real value increases in budget expenditure.

Where then would growth come from?

In reality, growth is best predicated on private sector enterprise. This is because there is limitless amount of funds available in the private sector for investment and growth. So, if the real sector has access to lower priced loanable funds, which are induced by the low cash reserve ratios set for banks, at say 5%, these banks would have increased leverage to create more money, in order to lend to investors who would put the loans to work, to create goods and services and more jobs.

If, conversely, reserve ratio, low cash that encourage advances is not readily available, industrial output and employment opportunities will rapidly contract. Consequently, it is a misplaced expectation to keep extolling the virtue of bloated nominal budget figures as drivers of real economic growth. Evidently, what drives an economy is the gamut of activities made possible, when cheap loanable funds are available from banks for onward lending to drive investment opportunities.

For example, if cost of funds hovers around 20% or more, it would be crazy to take loans at that rate because you would clearly have serious challenges to repay the debt, particularly in the face of the challenges of power, infrastructure and multiple taxes. But if cost of funds is modest at say 4-5%, for example, as in successful economies, investors will be able to access loans at a much cheaper cost and invest those funds in viable productive ventures that facilitate loan repayment.

But when excess supply of money subsists simultaneously with high cost of funds, the result is that government and CBN will begin to crowd out the productive real sector from the loanable funds in the market. The Central Bank particularly will be kept busy borrowing to reduce the inflationary impact of the perceived surplus money, by continuously offering to pay higher rates of interest to distract banks from lending to anyone!

Expectedly, banks are happier for the bountiful rates paid by government for what are clearly risk free sovereign loans. Indeed, there is not much inclination for banks to offer loans with over 20% interest to private sector industrialists who can hardly survive, with such rates; furthermore, if non performing loans increase, the survival of the banks themselves may be threatened.

Consequently, the economy can never grow, no matter the kind of EGRP you design, so long as banks have the facility to lend to government at double digit interest rates to fund budget deficits or in order for CBN to remove and sterilise part of the burdensome surplus money in the market to restrain inflation. Have you ever heard of any commodity that becomes more expensive the more surplus it gets? It is clearly logical that commodities that are in surplus will invariably be cheaper.

Why then is it that when Naira becomes surplus in the market, it becomes more expensive to borrow. That is an odd reality. This is a contradiction that suggests a fundamental flaw in the management of the economy. Consequently, the reality is that even if you design the best EGRP, but ignore the critical significance of the monetary tripod described above, i.e. lower single digit rates of inflation and cost of funds and truly a market determined exchange rate … it will be a miracle if any fiscal regenerative plan or vision succeeds.